A little over three years ago, anticipation was building for cannabis legalization going into effect in Canada in July 2018. At that time, Auxly Cannabis Group (CBWTF 6.11%) stock was sitting at the $2 mark while the company made inroads with pot producers for what many in the industry predicted would be explosive market growth as legalization took hold.
Well, that was three years ago, and a far cry from where we see the stock now, as it has tanked to only 10% of that price after multiple share dilutions and a struggle to make a profit.
Now, the company is clawing its way back into the discussion as a long-term investment option in a market where legalized pot is taking sales from the illicit market. And after a positive second quarter, the company might just have enough life to gain back investors' confidence.
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In late 2018, it was projected that the legal cannabis market in Canada would hit $5.3 billion by 2020. More recent numbers now call for the Canadian legal market for cannabis to reach as high as $6.2 billion by 2025. This still represents an uptick of 44% over the next three full years, but the market may be trying to make up for a bit of lost time due to delays from supply chain and regulatory hurdles, which lasted into early 2020.
Cannabis 2.0 to the rescue
The primary driver of the projected growth is a product set known as cannabis 2.0, which was legalized in Canada in late 2019. It includes vapes, edibles, beverages, extracts, and topicals.
After a full year of cannabis 2.0 products on the legal market in Canada, Auxly now finds itself at the leading edge of the 2.0 market, grabbing a 14% market share as of the beginning of 2021, including 19% of the total Canadian market in vape products, and 12% in edibles. These numbers made Auxly the top-selling cannabis 2.0 licensed producer in Canada for 2020.
A second (quarter) life
Following its recent performance in the Cannabis 2.0 market, Auxly is showing signs of life, as reported in its second-quarter earnings report released Aug. 16. Total revenue increased by 262% for the same quarter on a year-over-year basis, to a company quarterly record of $29 million, 75% of which was driven by cannabis 2.0 sales.
For the first two quarters of 2021 combined, compared to 2020, revenue has jumped 127% to over $41 million. The company has also managed to trim expenses, albeit by a slim amount partially offset by higher cost of goods sold, resulting in an end-of-quarter positive net income of $0.01, compared to a loss of $0.04 on a year-over-year basis for the same quarter. Year to date, Auxly is sitting at a breakeven net income, compared to a loss of $0.06 for the same period last year.
What's the risk?
Auxly's total market share stands at 5.4% as of July, backed by a 15.4% market share in Cannabis 2.0 products, which is coming off of record quarterly revenue. The company has a product portfolio of offerings, including its Back Forty brand, Foray Hard Maple Caramels, Dosecann Capsules, Kolab Project Cherry Cola Pop milk chocolates, and Kolab Project 232 Series live terpene vape cartridges, all of which launched during 2020 and will continue to be a focus into the remainder of 2021.
As it continues to develop and bring to market new products through its various partner collaborations, Auxly will also reap the benefits of its expanded production facility in Prince Edward Island, which was completed in the second half of 2020 and is just now approaching one year of full expanded production.
The company has also noted that it continues to look toward regulated international markets for strategic entry, though no major news has been stated or hinted at in regards to entry into the U.S. market, which would be a boon for the company.
There may be other places for investors to put their money, including other cannabis companies that have established operations in the U.S., such as Green Thumb Industries, Curaleaf, and Cresco Labs. But if you have $1,000 to invest and want to take a minimal risk, Auxly provides a high reward opportunity. The stock price currently sits at $0.20, which is half of its 52-week high of $0.41. It also offers a potential double gain -- to the tune of 138% -- should it hit the analysts' average 12-month price target of $0.47.
Coming off of a record quarter and a solid first half of 2021, it won't take long for investors to notice the potential for this turnaround play.
